Background
Oak Lawn Respiratory and Rehabilitation Center, LLC, along with two other nursing homes under common control, applied for loans under the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act. The Small Business Administration had adopted a Corporate Group Rule limiting the total guaranteed loans for any single corporate group to twenty million dollars. Although the individual nursing homes were separate limited liability companies, they were majority owned by a common partnership. When the group sought loan forgiveness, the SBA limited the benefit to the twenty million dollar cap, leaving the nursing homes liable for the remainder of the loans they had received.
The court’s reasoning
The court rejected the argument that the CARES Act required the agency to treat each separately organized limited liability company as an independent business concern. The statute does not define a business concern, and the agency has discretion to treat affiliated businesses as a single unit for regulatory purposes. The court noted that many federal agencies already treat affiliated businesses as one for regulatory purposes. The agency’s rule was not arbitrary or capricious because it served the legitimate purpose of ensuring limited resources were distributed to the largest possible number of borrowers. The court also found that applying the rule to loans disbursed after the rule’s effective date was not retroactive, as the borrower could have withdrawn the application or declined to draw funds once the rule was published.
What it means going forward
The decision confirms that the Small Business Administration can enforce aggregate loan limits across affiliated businesses, preventing large corporate groups from receiving excessive federal guarantees under the Paycheck Protection Program.